10-QSB [hf]

10QSB 1 p1990010q.htm QUARTERLY REPORT 10-QSB [hf]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(MARK ONE)

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23544

HUMAN PHEROMONE SCIENCES, INC.

(Name of small business issuer in its charter)


California		94-3107202
(State or other jurisdiction of incorporation or organization)		(I.R.S. employee Identification No.)


84 West Santa Clara Street, San Jose, California		95113
(Address of principal executive offices)		(Zip code)

Issuer’s telephone number: (408) 938-3030

Not applicable

(Former name or former address, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act). Yes [ ] No [ X ]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,151,954 shares of Common Stock as of August 9, 2006.

HUMAN PHEROMONE SCIENCES, INC.

INDEX

Page

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005

Statements of Operations (Unaudited) for the Three and Six Months Ended

June 30, 2006 and 2005

Statements of Cash Flows (Unaudited) for the Six Months Ended

June 30, 2006 and 2005

Notes to Financial Statements (Unaudited)

Item 2. Management’s Discussion and Analysis

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

Item 3. Controls and Procedures

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Human Pheromone Sciences, Inc.

Balance Sheets


	June 30,	December 31,
(in thousands except share data)	2006	2005
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$ 252	$ 452
Accounts receivable	52	11
Inventories, net	74	70
Other current assets	13	18
Total current assets	391	551

Property and equipment, net	5	8

	$ 396	$ 559


Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$ 79	$ 21
Accrued professional fees	49	63
Accrued employee benefits	35	27
Accrued sales returns	-	15
Accrued income tax	2	2
Other accrued expenses	11	12
Deferred revenue	10	-
Total current liabilities	186	140


Commitments and Contingencies
Shareholders’ equity: Common stock, no par value, 13,333,333 shares authorized, 4,151,954
shares issued and outstanding at each date	20,826	20,809
Accumulated deficit	(20,616)	(20,390)
Total shareholders' equity	210	419
	$ 396	$ 559

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Operations

(unaudited)


	Three months ended June 30,		Six months ended June 30,
(in thousands except per share data)	2006	2005	2006	2005

Net revenues	184	131	450	257
Cost of goods sold	58	17	111	58

Gross profit	126	114	339	199

Operating Expenses:
Research and development	35	48	59	94
Selling, general and administrative	247	319	507	645
Total operating expenses	282	367	566	739

Loss from operations	(156)	(253)	(227)	(540)

Other income
Interest income, net	-	5	1	11

Total other income	-	5	1	11


Net loss	$ (156)	$ (248)	$ (226)	$ (529)




Net loss per common share – basic and fully diluted	$ (0 .04)	$ (0 .06)	$ (0 .05)	$ (0 .13)


Weighted average common shares outstanding –basic and fully diluted	4,152	4,152	4,152	4,152

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Cash Flows

(unaudited)


	Six months ended June 30,
(in thousands)	2006	2005


Cash flows from operating activities
Net loss	$ (226)	$ (529)

Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization	3	5
Stock option compensation	17	-
Changes in operating assets and liabilities:
Accounts receivable	(41)	178
Inventories	(4)	6
Other current assets	4	(26)
Accounts payable and accrued liabilities	37	(31)
Deferred revenue	10	-
Net cash used in operating activities	(200)	(397)


Cash flows provided by (used in) investing activities
Acquisition of property and equipment	-	(1)

Net cash used in investing activities	-	(1)


Cash flows used in financing activities
	-	-
Net cash used in financing activities	-	-


Net decrease in cash and cash equivalents	(200)	(398)
Cash and cash equivalents at beginning of period	452	1,201
Cash and cash equivalents at end of period	$ 252	$ 803



See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Notes to Financial Statements

(unaudited)

June 30, 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

The Company, a California corporation, was founded in 1989 as EROX Corporation to develop and market a broad range of consumer products containing human pheromones as a component. On May 29, 1998, the shareholders of the Company voted to change the name of the Company to Human Pheromone Sciences, Inc. Human Pheromone Sciences, Inc. is alternatively referred to in this report as “we,” “us,” “our,” “HPS” or the “Company”.

The Company believes that human pheromone research funded by the Company presents an opportunity to create and market an entirely new category of pheromone-based fragrances and toiletry products, as well as other types of consumer products that do not require FDA approval as a pharmaceutical product. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing such products.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six and three months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2006. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2005.

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales initiated by sales agents, net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 and No. 104. The majority of the Company’s sales are to distributors and licensees, and these distributors and licensees have no right to return products.

Inventories

Inventories are stated at the lower of cost (first in - first out method) or market. A summary of inventories follows (in thousands):



	June 30, 2006 (unaudited)	December 31, 2005

Components (raw materials)	$ 68	$ 56
Finished goods	34	39
Reserve for shrinkage and obsolescence	(28)	(25)
	$ 74	$ 70

Earnings (Loss) Per Share

The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the three months ended June 30, 2006 and 2005, options to purchase 808,000 and 442,165 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive.

As of June 30, 2006 and 2005, the unaudited components of basic and diluted earnings per share are as follows (all amounts are in thousands):


	2006	2005

Net income (loss) available to common shareholders	$ (226)	$ (529)


Weighted-average common shares outstanding during the period	4,152	4,152

Capital Stock and Stock Options

During the six months ended June 30, 2006 no common stock or preferred stock was issued. During the quarter ended June 30, 2006, options to purchase 60,000 share of common stock were granted under the 2003 Non-Employee Directors Stock Option Plan, options to purchase 330,000 shares of common stock were granted to employees pursuant to the Nonstatutory Stock Option Agreements issued outside of the Company’s equity incentive plans. No issued options were exercised and 10,000 stock options expired under the expired 1990 Stock Option Plan.

The Company adopted SFAS 123 (R) for accounting for its stock options effective with the fiscal year beginning January 1, 2006. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes pricing model has assumptions for the risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the past seven years of market prices of the Company’s common stock. The expected life of an option grant is based on various factors including historical exercise and expiration experience rates in addition to the life of the option. The Company adjusted the compensation expense by a forfeiture factor based on historical experience. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

The Company does not record the stock compensation expense net of taxes since there was no provision for income taxes for the periods ended June 30, 2006 and June 30, 2005 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset disclosed in the income tax footnote.


Stock Option Grants	2006 Option Grants	2005 Option Grants

Weighted Average Interest Rates	5.10%	4.00%
Dividend Yield	0.00%	0.00%
Volatility factor of the Company’s common stock	180%	149%
Forfeiture factor – Nonstatutory Stock Option Agreements	5%	-
Forfeiture factor – 2003 Non-Employee Directors Stock Option Plan	-	-
Weighted average expected life	7 years	5 years

A summary of the activity under the 1990 Option Plan is as follows (in thousands except per share data):


1990 Option Plan	Three months ending June 30, 2006		Six months ending June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price

Outstanding, beginning of period	188	$ 1.03	188	$ 1.03
Options Granted	-	-	-
Canceled or Expired	(10)	$ 1.03	(10)	$ 1.03

Outstanding, June 30, 2006	178	$ 1.03	178	$ 1.03

All of options under this plan are fully vested.

A summary of the activity under the Non-Employee & Director Plan is as follows (in thousands except per share data):


Non-Employee & Director Plan	Three months ending June 30, 2006		Six months ending June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price

Outstanding, beginning of period	250	$ 1.66	250	$ 1.66
Options Granted	60	$ 0.32	60	$ 0.32
Canceled or Expired	(10)	$ 23.64	(10)	$ 23.64

Outstanding, June 30, 2006	300	$ 0.66	300	$ 0.66

A summary of the non-vested options activity under the 2003 Non-Employee Directors Stock Option Plan (the only Plan with unvested options) is as follows (in thousands except per share data):


Non-employee & Director Plan Non-vested Options	Three months ending June 30, 2006		Six months ending June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price

Outstanding, beginning of period	25	$ 0.40	40	$ 0.40
Options Granted	60	$ 0.32	60	$ 0.32
Vested	(20)	$ 0.38	(35)	$ 0.39

Outstanding, June 30, 2006	65	$ 0.33	65	$ 0.33

A summary of the activity pursuant to the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):


Nonstatutory Stock Option Agreements	Three months ending June 30, 2006		Six months ending June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	-	-	-	-
Options Granted	330	$ 0.32	330	$ 0.32
Canceled or Expired	-	-	-	-

Outstanding, June 30, 2006	330	$ 0.32	330	$ 0.32

A summary of the non-vested options activity under direct Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):


Nonstatutory Stock Options Agreements Non-vested Options	Three months ending June 30, 2006		Six months ending June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	-	-	-	-
Options Granted	330	$ 0.32	330	$ 0.32
Vested	(14)	$ 0.32	(14)	$ 0.32

Outstanding, June 30, 2006	316	$ 0.32	316	$ 0.32

The Company recorded $12,000, and $17,000 of employee and non-employee compensation expense for stock options during the three and six months ended June 30, 2006, respectively. At June 30, 2006 there was $112,000 of unrecognized compensation costs related to non-vested share-based compensation under the 2003 Non-Employee Directors Stock Option Plan and the Nonstatutory Stock Option grants. This cost is expected to be recognized over the following twenty three months.

Prior to adopting SFAS 123 (R) the Company applied APB 25 and related Interpretations in accounting for its employee stock options. Had compensation expense been determined based upon the fair value of the awards at the grant date and consistent with the method under SFAS No. 123 (R), the Company’s net income (loss) per share would have been increased as shown by the pro forma amount indicated in the following table (in thousands):


	Three months ended	Six months ended
	June 30, 2005	June 30, 2005
	(unaudited)	(unaudited)
Net income (loss):
As reported	$ (248)	$ (529)
Deduct total stock based employee compensation
expense determined under fair value method for
all awards, net of tax	(9)	(17)
Pro forma	$ (257)	$ (546)

Basic and diluted loss per share:
As reported	$ (0.06)	$ (0.13)
Pro forma	$ (0.06)	$ (0.13)

INCOME TAXES

There was no provision for income taxes for the periods ended June 30, 2006 or June 30, 2005 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards.

A reconciliation of the effective tax and the statutory U.S. federal income tax is as follows:


	Six months ending June 30,
	2006	2005
	(unaudited)	(unaudited)
Federal (tax benefit) at the federal statutory rate	$ (77)	$ (84)
Other differences	-	-
Permanent differences	-	-
Increase (decrease) in valuation allowance	77	84
Income tax benefits	$ -	$ -

At June 30, 2006, the Company had federal net operating loss carryforwards of approximately $19,372,000. The Company also had federal and state research and development tax carryforwards of approximately $222,000. The net operating loss and credit carryforwards will expire between 2006 and 2021. The utilization of certain of the loss carryforwards is limited under Section 382 of the Internal Revenue Code.

Temporary differences that give rise to a significant portion of the deferred tax asset are as follows (in thousands):


	June 30,	December 31,
	2006	2005
	(unaudited)
Deferred tax asset:
Net operating loss carryforward	$ 6,898	$ 6,813
Research credit carryforward	222	222
Reserves and accruals	88	62
Other, net	(134)	(112)
Valuation allowance for deferred tax assets	(7,074)	(6,985)
Net deferred tax assets	$ -	$ -

Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The net valuation allowance has increased by $89,000 in the first six months of 2006. The valuation allowance was established because the Company was not able to determine that it is more likely than not that the deferred tax asset will be realized.

2. SEGMENT INFORMATION

Revenues by geographic markets for the three and six months ended June 30, 2006 and 2005 were as follows:


		Three months ending June 30,		Six months ending June 30,
		2006	2005	2006	2005
	(unaudited)		(unaudited)	(unaudited)	(unaudited)
Markets:
U.S Markets	$ 103		$ 128	$ 248	$ 175
International Markets	81		3	202	82

Net Sales	$ 184		$ 131	$ 450	$ 257

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company’s plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in “Risk Factors”, below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition and license fees. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.

Stock Option Policy

The Company adopted SFAS 123 (R) for accounting for its stock options effective with the fiscal year beginning January 1, 2006. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes pricing model has assumptions for the risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the past seven years of market prices of the Company’s common stock. The expected life of an option grant is based on various factors including historical exercise rates in addition to the life of the stock option. The Company did adjust the compensation expense by a forfeiture factor based on historical experience. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

The Company did not record the stock compensation expense net of taxes since there was no provision for income taxes for the periods ended June 30, 2006 or December 31, 2005 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset disclosed in the income tax footnote.

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales, initiated by sales agents, net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 and No. 104. The majority of the Company’s sales are to distributors and licensees, and these distributors and licensees have no right to return products.

COMPANY OVERVIEW

The Company is engaged in the research, development, manufacturing and marketing of consumer products containing synthetic human pheromones and other mood enhancing compounds. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. Licensing of the Company’s technology is currently the core business of the Company while directly managing the on-going development of identified compounds for potential new products. The Company’s patented compounds are sold to licensed customers and included as components in their fragranced consumer products. The Company also offers private label manufacturing services for third party consumer product licensees.

Results of Operations

Three Months ended June 30, 2006 compared to the Three Months ended June 30, 2005

Net revenues for the second quarter of 2006 were $184,000, representing a 40% increase from the prior year’s revenues of $131,000. Domestically, revenues were $25,000 less than the prior year, attributable to decreased pheromone reorders from existing licensees. Domestic customer’s purchasing patterns continue to be erratic and the Company is not always aware of the customers’ manufacturing and marketing plans so these fluctuations will continue to occur. International revenues were $78,000 more than the prior year due to increased sales to distributor in Asia.

Net revenue for the quarters ended June 30, 2006 and 2005 were as follows (in thousands):


	2006	2005
Markets:
U.S Markets	$ 103	$ 128
International Markets	81	3

Net Sales	$ 184	$ 131

Gross profit for the quarter ended June 30, 2006 of $126,000 is 11% more than last year’s gross profit of $114,000. As a percentage of sales, gross profit of 68% was less than last year’s gross profit of 87%. The decreased gross margin was caused by an increased sales of lower margin private label products in the current period compared to last year’s higher level of pheromone sales. The increase in gross profit is attributed to the higher sales level for the current quarter.

Research and development expenses for the second quarters of 2006 and 2005 were $35,000 and $48,000, respectively. The decrease of the research expenditures was the result of the Company not requiring the same level of activity in 2006 as in 2005. In 2005, the Company conducted various levels of testing, including human testing, on two new compounds, with encouraging results. Research and development on several new compounds is on-going.

Selling, general and administrative expenses of $247,000 are $72,000 less than last year’s $319,000. Selling, marketing and distribution expenses were $21,000 less than the prior year as the Company reduced marketing consulting fees. General and administrative and facility costs decreased by $51,000, primarily a result of reduced payroll related costs, consultant and legal fees. All of these reductions are associated with plans initiated in 2005 that were realized during the current year.

The Company earned less than $1,000 and $5,000 in net interest income during the three months ending June 30, 2006 and 2005, respectively. The decrease is due to lower cash balances.

The Company recorded no income tax provision in 2006 or 2005, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of June 30, 2006, the Company’s gross deferred tax asset, which relates primarily to net operating losses carried forward was $7,074,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not.

Six Months ended June 30, 2006 as compared to the Six Months ended June 30, 2005

Net revenues for the six months ended June 30, 2006 were $450,000. This was a 75% increase from net revenues of $257,000 for the first half of 2005. Domestically, revenues were $73,000 more than the prior year’s $175,000. Domestic reorders from existing accounts increased sales in the current year. Since the Company is not always aware of its customer’s manufacturing and marketing plans, revenue fluctuations will occur. International revenues were $120,000 greater than the prior year due to increased sales in the Asian and Latin American markets

Net revenues for the six months ended June 30, 2006 and 2005 were as follows:


Markets	2006	2005

U.S Markets	$ 248	$ 175
International Markets	202	82

Net Revenues	$ 450	$ 257

Gross profit for the first half of 2006 increased 70% to $339,000 from $199,000 in 2005. The increase gross profit is the result of the increased sales. Gross margin decreased slightly to 75% compared to 77% in 2005 due to the increase of private label sales in markets outside the United States.

Research and development expenses for the first half of 2006 and 2005 were $59,000 and $94,000, respectively. The decrease of the research expenditures was the result of the Company not requiring the same level of activity in 2006 as was incurred in 2005. In 2005, the Company conducted various levels of testing on two new compounds, with encouraging results. Development work on these compounds, and others, is continuing in 2006 with reduced cost requirements.

Selling, general and administrative expenses for the first half of 2006 were $507,000 and $645,000 for the comparable period of 2005, a $138,000 reduction. Selling, marketing and distribution expenses are $40,000 less than the prior year as the Company reduced marketing consulting fees. General, administrative and facility expenses were $98,000 less than last year primarily due to decrease payroll related costs and consultant fees.

The Company earned less than $1,000 and $11,000 in net interest income during the six months ending June 30, 2006 and 2005, respectively. The decrease is due to lower cash balances.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2006, the Company had cash of $252,000 with no outstanding bank borrowings and working capital of $205,000. At December 31, 2005, it had cash of $452,000 with no outstanding bank borrowings and working capital of $411,000. For the first six months of 2006, net cash used in on-going activities was $201,000 compared to the prior year’s $397,000 and is the result of a reduction of the net loss for the current year.

The Company’s current cash position and projected results of operations for the year 2006 requires that additional sources of funding be obtained. Unless the Company raises additional funds by debt or equity issuances, asset sales or a significant increase in product sales accompanied by reductions in corporate spending, the Company’s current cash on hand will be insufficient to cover its working capital requirements. The Company is actively working on securing the required funding, and it is not known how successful those efforts might be.

The Company may be unable to raise sufficient additional capital when needed or to raise capital on favorable terms. The sale of equity or convertible debt securities in the future may be dilutive to the Company’s stockholders and debt financing arrangements may require the Company to pledge certain assets and enter into covenants that could restrict certain business activities or the Company’s ability to incur further indebtedness, and may contain other terms that are not favorable to the Company or its stockholders. If the Company is unable to obtain adequate funds on reasonable terms, it may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms.

Risk Factors

Our business is subject to various risks, including those described below. You should carefully consider the following risk factors and all other information contained in this Form 10-QSB. If any of the following events or outcomes actually occurs, our business, operating results, and financial condition would likely suffer.

The Company’s current cash position and projected results of operations for the year 2006 requires that additional funding be obtained. Unless the Company raises additional funding by debt or equity issuances, asset sales or a significant increase in product sales accompanied by reductions in corporate spending, the Company’s current cash on hand is will be insufficient to cover its working capital requirements. The Company is actively working on securing the required funding but it cannot guarantee that it will be successful.

The Company has not had sustained profitable operations since 1997. Since 1997, the Company has incurred losses from operations. In May 2000, the Company refocused its business model based on product licensing agreements. While the Company anticipated that this change in its business will result in profitable operations, it has not to date, and the Company’s license based business model may not be successful in the future. To maintain the current operations, the Company will require additional funding due to the continued operating losses sustained and projected.

The Company’s marketing strategy may not be successful. The Company may not be able to establish and maintain the necessary sales and distribution channels, even if funding is obtained. Consumer product companies may choose not to license or private label the Company’s products.

The Company may not be able to protect its technology or trade secrets from others who choose to violate the Company’s patents. The Company intends to protect and defend its patent rights from those who might violate them. However, the costs to defend and litigate may exceed the Company’s financial resources.

The Company may not be able to develop new patentable compounds. The Company’s success substantially depends upon developing and obtaining patents for new mood and sensory enhancing compounds. The Company requires that its products be scientifically tested validating the human responses to the compounds. The Company may not be successful in validating that the desired human responses are obtained.

The Company may not be able to recruit and retain key personnel. The Company’s success substantially depends upon recruiting and retaining key employees and consultants with research, product development and marketing experience. The Company may not be successful in recruiting and retaining these key people.

The Company relies upon other companies to manufacture its products. The Company and its distributors/licensees rely upon other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company and its distributors/licensees may not be able to obtain or retain pheromone manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. This would adversely affect operating results.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual shareholder meeting was held on June 21, 2006, at which the following proposal was approved:

Proposal 1: Election for the following Directors:


Name	Votes For	Votes Withheld

William P. Horgan	2,742,689	79,450
Bernard I. Grosser, M.D.	2,743,355	78,784
Helen C. Leong	2,742,223	79,916
Robert Marx	2,743,338	78,801

Item 5. Other Information

On June 22, 2006, Mr. William Horgan was granted an nonstatutory stock option outside of the Company’s equity incentive plans to purchase 300,000 shares of the Company's common stock, which will vest and become exercisable in twenty four equal monthly installments beginning on June 22, 2006; provided that in the event of a termination without cause (as defined in the stock option agreement), the vesting and exercisability of the unvested shares will accelerate. The option exercise price is $0.315 per share

Item 6. Exhibits

Exhibits

Exhibit 10.12 Form of Nonstatutory Stock Option Agreement

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act

Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized.

HUMAN PHEROMONE SCIENCES, INC.

Date: August 9, 2006

/s/ William P. Horgan

William P. Horgan

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date: August 9, 2006

/s/ Gregory S. Fredrick

Gregory S. Fredrick

Chief Financial Officer

(Principal Financial Officer and Principal Accounting

Officer)